India one of the most cash intensive economies

Demonetization move may affect India’s growth in short term as informal sector, supported primarily by cash transactions, will slow down, cautions Deutsche Bank report


The underlying growth momentum in manufacturing, trade, construction and transportation is already weak. Photo: Ramesh Pathania/Mint
The underlying growth momentum in manufacturing, trade, construction and transportation is already weak. Photo: Ramesh Pathania/Mint

The government’s demonetization move is likely to affect India’s growth in the short term as the informal sector, supported primarily through cash transactions, would slow down, cautioned a report by Deutsche Bank.

India remains one of the most cash-intensive economies in the world, with currency/GDP at 12.2%, higher than Brazil, Mexico and South Africa, it said.

The underlying growth momentum in manufacturing, trade, construction and transportation is already weak.

These sectors constitute 73% of total informal employment in the economy and the demonetization move may see their growth slow further in the short term.

Cargo traffic growth at major ports tops Feb high

Cargo handled at major ports grew by an impressive 13.2% in October, slightly above the high level of February, shows data from Emkay Global Financial Services Ltd. Petroleum, oil and iron ore trade saw healthy growth.

The growth was partly aided by a favourable base.

The sub-category of others, which is known to exhibit a volatile trend, registered strong growth.

It includes farm products and projects’ cargo among others.

October’s cheer has been missing in the earlier part of the fiscal year, however, and growth so far this fiscal year remained subdued at 6.3%.

If the growth seen in September and October is sustained, then the second half may pull up full-year figures.

Liquidity squeeze can hit rural incomes

The removal of high-value currency notes from circulation and the resultant fear of a liquidity squeeze can potentially impact rural incomes.

An Elara Securities (India) Pvt. Ltd report, citing data from the National Council of Applied Economic Research, says rural households are increasingly generating significant income from non-farm activities like construction, wood products and land transport, which are closely linked to the broader economy.

From around a quarter in 1970, the share of non-farm income rose to 68% in 2015, says the Elara report.

So, if indeed the currency demonetization inflicts a temporary economic slowdown, as feared, the impact can be felt on rural incomes also.

Adding to the anxiety is the potential dampening of real estate and land value, and JM Financial Institutional Securities Ltd believes this could hit “the sentiment in rural India towards consumption despite a robust farm income cycle this fiscal”.

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